Standing Committee A

[Sir John Butterfill in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and schedules 1, 3, 11, 12, 21 and 37 to 39)

Ruth Kelly: I beg to move amendment No. 426, in
clause 171, page 148, line 32, after 'would' insert 
 ', on the valuation assumptions (see section (Valuation assumptions)),'.

John Butterfill: With this it will be convenient to discuss the following:
 Government amendment No. 430. 
 Amendment No. 401, in 
clause 201, page 168, line 26, at end insert 
 ', multiplied in either case by actuarial equivalence factor.'.
 Government amendments Nos. 431 to 433. 
 Amendment No. 402, in 
clause 201, page 169, line 14, at end add— 
 '(12) In this Part, the actuarial equivalence factor is the factor certified from time to time by the Government Actuary which is appropriate having regard to the age of the individual.'.
 Government amendments Nos. 436, 437, 439 to 444, 446 to 455 and 474. 
 New clause 16—Valuation assumptions— 
'For the purposes of this Part the valuation assumptions in relation to a person and any benefits are— 
 (a) if the person has not reached such age (if any) as must have been reached to avoid any reduction in the benefits on account of age, that the person reached that age on the date, and 
 (b) that the person's right to receive the benefits had not been occasioned by physical or mental impairment.'.

Ruth Kelly: This group of Government amendments and new clause 16 concern valuation rules. They ensure that there is a consistency of approach across the new regime in all areas where an individual's uncrystallised rights need to be valued. For example, it may be necessary to determine the value of those rights to determine the extent of borrowing that may be made by a registered scheme in respect of a particular arrangement.
 Clause 171 provides rules on that point. The limit is set at 50 per cent. of the value of crystallised and uncrystallised rights under the arrangement. Amendment No. 426 ensures that the value to be used when valuing the member's uncrystallised rights is clear. The valuation is not to take account of any adjustment in benefit that may apply because of ill health or because of taking benefits early. 
 It is necessary to value an individual's uncrystallised rights for other purposes—to determine whether the unauthorised payment surcharge applies, to quantify the enhanced lifetime allowance where an individual has been non-resident or has made transfers into a 
 registered scheme from an overseas scheme, and to quantify the increase in pension rights in any particular year when applying the annual allowance. 
 The amendments and the new clause clarify the valuation rules in all those areas and give a simple, clear and consistent approach to valuation across the piece whenever individuals' uncrystallised rights need to be valued. They will give additional certainty in such important matters to individuals and to schemes. Indeed, we introduced them partly in response to Finance Bill representations that I received on the matter that asked for greater clarity. For those reasons, I trust that the Committee will accept them. 
 Amendment Nos. 401 and 402 concern clause 201, which itself concerns the 15 per cent. surcharge that applies to unauthorised payments, where such payments exceed 25 per cent. of the value of a fund. Clause 201 sets out how a member's uncrystallised rights are to be valued when determining whether the surcharge threshold of 25 per cent. for member's rights under the pension arrangements has been breached. 
 Rights are uncrystallised if a member is not yet entitled to a payment of benefits in respect of those rights. The value of the rights is calculated in different ways depending on the type of arrangement that the member has. Standard valuation factors, or market values are used in arriving at the value, so members will be able to self-assess whether the threshold has been breached. 
 The value of a member's arrangement means the value of that arrangement at the date that the unauthorised payment is made. For money purchase arrangements, that is the value of the assets and money held in relation to the arrangements. For cash balance schemes and defined benefit arrangements, the calculation is inevitably more complicated, because there is no actual fund held by the scheme directly related to the arrangements. The clause takes as the value the amount of benefit that would be provided by those schemes assuming benefits were taken at that date, with no reduction for the fact that the individual has not yet reached retirement age. 
 The amendments, which seek to increase the value of the money purchase fund to what it would be at the member's retirement age, are based on a misunderstanding of clause 201. The clause is designed to value the member's arrangement at the date that the payment is made. It is right that the payment is valued at that date. The charge relates to amounts taken out of the fund. It must relate to the actual amount of the fund and not a notionally increased fund. 
 To increase a fund by an actuarial factor would be unfair. If two members each had £100,000 in the fund and took out £30,000 as an unauthorised payment, they may get different tax treatments if one is 25 and the other is 55. An actuarial enhancement would increase the 25-year-old's fund far more than that of a 55-year-old. 
 The amendment is technically deficient. It provides only that the actuarial enhancement is based on the member's age. It does not provide details of the factor to which it is to be enhanced. Is it the normal 
 retirement age? Is it 65, 75 or even 80? We do not know. Therefore, given the uncertainties attached to the amendment and the correctness of the Government's approach, I ask Opposition Members not to press their amendments to a vote.

George Osborne: The Financial Secretary has taken a leaf out of the Prime Minister's book and made a pre-emptive strike on our amendments, which attempt to tease out a debate about the valuation of people's pots in defined benefit and defined contribution schemes and about the ways in which they are treated differently. With your latitude, Sir John, perhaps we will have that debate in several forms this afternoon.
 The Government like to believe that they are creating a single regime for pensions; indeed, the Financial Secretary said so at the beginning of our discussions on these clauses. PricewaterhouseCoopers says that in fact they are creating six regimes. I am doing a bit of triangulation—[Hon. Members: ''Triangulation?''] Well, it was invented by Dick Morris, and we all had better pay attention to him these days.
 My basic point is that there are two regimes. Defined contribution and defined benefit schemes are treated very differently because of the way in which the pension pots and rights, whether crystallised or uncrystallised, are valued. We are having this debate now because the amendments have been selected for this clause, but they really apply to clauses 201 onwards. 
 A person who is in a defined benefit scheme and who is entitled to a pension of £75,000 a year from, for example, a final salary scheme, is deemed to have a pot worth £1.5 million. That is because of the 20 to 1 valuation factor that will be discussed later under clause 263. The official Opposition—I am always a bit nervous when I speak for my hon. Friend the Member for Arundel and South Downs (Mr. Flight), but I am sure that I do so correctly on this occasion—believe that that factor is a good, simple way of valuing a pot. It is particularly generous if someone is 50, particularly mean if they are 70, but fair if they are 60. 
 Someone who is entitled to a defined benefit pension of £75,000 a year is deemed to have a pot of £1.5 million. However, someone with a real pot of £1.5 million—someone with a money purchase pension with £1.5 million in it—is unlikely to be able to draw from that pot a pension worth £75,000 a year. Yesterday, I checked out the Financial Services Authority website. That is the sort of exciting thing that I do for a living these days. I checked out the circumstances for a 60-year-old male who is a non-smoker—I am sorry to disappoint my hon. Friend the Member for Arundel and South Downs—with a spouse who is three years younger, looking for a two-thirds spouse's pension and a five-year guarantee that rises with inflation. That is roughly what many defined benefit schemes would offer. If that person had a £1.5 million pot, they would be able to get a pension worth £54,840 a year. That is more than £20,000 short of the £75,000 a year that the person with a defined 
 benefit scheme and a nominal pot of £1.5 million is able to claim.

Rob Marris: Did the hon. Gentleman check the figures on the website for cases in which the survivor's pension would be 50 per cent., rather than the two thirds that he cited? The figure of 50 per cent. is much more common in defined benefit schemes, particularly in the public sector.

George Osborne: To be honest, I did not, but as part of the letter that I am about to send the hon. Gentleman and copy to the hon. Member for Ealing, North (Mr. Pound), I will be happy to do that. I checked a number of variables. For example, a 55-year-old male in similar circumstances could draw a pension of only £48,960. If we included a 50 per cent. spouse's pension in our calculation, we would still be far short of the £75,000 a year that the Government say a £1.5 million pension pot secures for someone in a defined benefit environment.
 One pension adviser said to me, ''You might as well tie a leper's bell around the defined contributions member's neck.'' At a time when more and more schemes outside the public sector are becoming defined contribution schemes, what we are seeing is very unfair and creates more resentment of the generous public sector defined benefit arrangements. 
 Of course, we are talking about people on very large pensions, but what we are seeing sends out a message about the way in which the different types of schemes will be treated and the unlevel playing field that the Government have produced for the two different types of pension arrangement, one of which—the defined contributions scheme—is becoming much more popular than the other. 
 My amendments are to clause 201, which is about the valuation of uncrystallised rights for the purposes of levelling an unauthorised charge. I listened to what the Financial Secretary said and take her point that this may not be the best place to make my point. It would be unfair to level an unauthorised charge on what someone should have in theory, rather than what they actually have. There are circumstances in which people could be overcharged as a result. For that reason, I will not press my amendments. However, although the arrangement is clear, simple and fair for defined benefit schemes, for which the 20 to 1 valuation factor is used, the same degree of fairness does not apply to defined contribution schemes. We will return to that point later in our deliberations.

Howard Flight: My hon. Friend has put the underlying point in relation to our two amendments extremely well. We are dealing with difficult territory to which not enough thought has been given. As he said, there are two entirely different arrangements: one for defined benefits and one for defined contributions. In the main, the defined benefit situation turns out to be enormously more generous, but there are even variations within that, in that the value of a defined benefit pension taken at 55 is clearly a great deal higher than one taken at 65. The Committee should
 think very hard about this issue. It will come up more in relation to clause 205 than in relation to this clause.
 I have always been broadly in favour of rough justice if it works and if the differences are not too great, rather than cluttering up systems with too much complexity. However, it has been illustrated that there is potentially a yawning gap that will work out in favour of defined benefit schemes and against the interests of defined contribution schemes, when virtually everyone in the private sector is being driven down the road of defined contribution and when, for the time being at least, those in the public sector are essentially in defined benefit arrangements. 
 Clause 205 inter-relates to the two amendments. The main thrust of our principle is to at least examine valuing defined contribution on the same basis as defined benefit by converting the lump sum of money into whatever annuity pension it would buy on the same basis as defined benefit. That is one measure of achieving relative parity, which we will debate later. 
 Although there may be arguments that the first stage of the proposals for uncrystallised benefits is not appropriate, it is important to flag up the arguments as we move on to the clauses that deal with what happens when people take pensions. I am extremely uncomfortable—hence our upcoming amendments—about having a system that is fairly arbitrary and, in terms of valuation for the purposes of the tax charge to be levied, one that has a tremendous bias against defined contribution and in favour of defined benefit. 
 Rough justice has its price, and the price in the provisions before us is a little bit too high. When we get to the later clauses, I look forward to the Minister elucidating how the provisions allow flexibility of interpretation within the 20 to1 ratio.

Rob Marris: Will the Financial Secretary explain new clause 16 because I am not sure that I understand it? In particular, will she explain paragraph (a), which refers to ''the date''? It is not clear from the wording of the new clause, which would, as I understand it, stand alone, to what ''the date'' refers.

Ruth Kelly: I rise first to ask for your guidance, Sir John. Practically all Opposition comments have been directed towards the general debate on the valuation factor, 20 to 1, and how it affects DB and DC schemes. I am very happy to respond to them now with your permission, Sir John. Of course, we do not want to re-run the debate this afternoon, so with your permission I will continue.

John Butterfill: That is fine.

Ruth Kelly: Great. In which case, I will deal with it now. The hon. Member for Tatton (Mr. Osborne) falls into a trap. First, he says that there are six types of tax regime. We have already had that debate, and there is one simplified tax regime, however the pension tax rules must recognise that pensions are taken in different ways. He seems to assume that there are only two ways in which pensions are taken—either as a defined benefit, or, through a defined contribution scheme, as an annuity.
 Clearly, there is a third way, which is income draw-down. When considering those issues, one must always consider how one would treat income draw-down. For example, were we to choose to have a valuation factor for DB schemes of 20 to 1, or whatever the hon. Gentleman might prefer, and equally to decide to apply that factor to DC schemes, we could not use the same method for valuing funds in income draw-down, because annual income varies. There may be no income to apply to that valuation factor in a particular year, so we will need more than one way of valuing benefits. It is simply not possible to use the same mechanisms to value all the different benefit crystallisation events. We designed the valuation rules to give broadly accurate results in the most simple and straightforward way possible. The amendment that we may turn to in discussing how the valuation factor applies would undermine that. It would not give the same level of fairness or equality. 
 The second point is that we consulted widely on the regime. In the first round of consultation on pension simplification, the UK actuarial representative bodies supported the use of a single valuation factor for DB pensions. The Association of Consulting Actuaries firmly recommended a single factor and, after considerable research, proposed 20 to 1 as the most appropriate if there was an appreciable margin in the level of the lifetime allowance. In setting the lifetime allowance at £1.5 million, we have given that margin. 
 As the National Audit Office agreed, the new regime mirrors the maximum pension under the 1989 regime. The Faculty of Actuaries and the Institute of Actuaries said at the time that 
''the factor should not attempt to accurately reflect market conditions at the time of calculation, as that would unnecessarily complicate retirement planning.''
 The most accurate result for those taking pensions around the age of 60 was 20 to 1. That is the age at which the majority of people take their pension. 
 The hon. Member for Arundel and South Downs tried to persuade the Committee that we are giving much more support to DB schemes than to DC schemes. There are some in the House who may think that that would be a good idea, but I am sorry to disappoint them. It is perfectly clear to me that, if there is an incentive to take a DB scheme rather than a DC scheme in one year, that may well change in future years as annuity rates change, and the relative attractiveness of each option may change over time. 
 If someone feels that they are disadvantaged in a money purchase scheme, they can always transfer to a scheme pension run by an insurance company and use the 20 to 1 valuation factor, if insurance companies decide to offer that vehicle for the non-corporate market. Under our plans, there is no reason that they could not offer such a vehicle. If the reverse were true, and someone felt disadvantaged by being in a DB scheme rather than a DC scheme, as could happen, of course they could switch to take advantage of annuity rates. 
 I do not think that the measure is unfair. I think that it is by far the easiest, most transparent and simplest way of approaching the problem. It is the way that has been suggested to us by the actuarial 
 profession as striking a fair balance and giving a reasonable level of pension for those in DB schemes. That presents the case for the valuation factor of 20 to 1. 
 My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) asked about paragraph (a) and what date it refers to. It refers to the date at which the benefits need to be valued. All the clauses that depend on new clause 16 will make it clear what that date should be. I hope that my hon. Friend rests assured on that point. 
 Amendment agreed to. 
 Clause 171, as amended, ordered to stand part of the Bill. 
 Clauses 172 to 174 ordered to stand part of the Bill.

Clause 175 - Income

Howard Flight: I beg to move amendment No. 423, in
clause 175, page 150, line 40, at end insert 
 'but only to the extent that the investments are prescribed as being investments which such a registered pension scheme may hold.'.

John Butterfill: With this it will be convenient to discuss amendment No. 424, in
clause 175, page 151, line 4, at end add— 
 '(5) No registered pension scheme may hold investments which are not prescribed as being investments which such a registered pension scheme may hold and section 10 of the Pensions Act 1995 applies to any scheme administrator or trustee of a registered pension scheme who has failed to take reasonable steps to ensure that that registered pension scheme holds only prescribed investments.'.

Howard Flight: As the Committee will be aware, part of the new arrangements abandons the regime of investment restrictions that were tied to tax approval. Apart from one or two items, the new registration system will create an open house in respect of the investments in which pension schemes can invest in the future. We have touched on this before. I question the logic whereby the other main way of saving for retirement has been personal equity plans and, subsequently, individual savings accounts. The regime under which PEPs and ISAs have made investments has been fairly liberal, but it has been designed to shield out things that are likely to be extremely volatile and high-risk and by which people might get ripped off. As a simple example, it establishes what are, in essence, approved markets that are reasonably liquid and excludes equity markets that are sufficiently dangerous to be deemed unsuitable for ISA investment of monies for retirement.
 As an economic liberal who broadly welcomes the ending of over-prescriptive regimes, I have concerns about the wisdom of moving to what is in effect a completely open regime for the large number of individual money purchase pension pots, be they structured as personal pension schemes or, as is increasingly the case, as various forms of occupational money purchase pension schemes in which the individuals who benefit are largely controlling the investments. At worst, such a regime 
 could expose people to exploitation by those who market unsuitable products. It will inevitably lead to scandals in the future, and people will ask, ''Why did the Government permit us to participate in investments that have gone bust and that were never particularly suitable for pension saving?'' 
 There is a dichotomy, because I certainly do not want to clutter the arrangements with too much complexity. I commend the Government for biting the bullet and saying, ''Let's scrap the whole lot.'' For example, I have always felt it illogical that money purchase schemes could not invest at all in venture capital investments. It may not be appropriate for them to invest all their money in such investments, but a modest amount is perfectly justifiable. 
 We could get out of the frying pan and into the fire. Therefore, our amendments are prophylactic. They leave open the possibility of thinking about a regime that is somewhat analogous to the PEP and ISA regime: one that is broad and not a hassle but which screens out and protects individuals from deciding mistakenly or unwisely, or being conned into, investing in areas that are not particularly suitable for pension fund savings. 
 Another point relates directly to the two amendments but is slightly wider. The Committee may not be aware that if money purchase pensions are structured as insurance wrapped, life companies are the legal owners of the assets. If life companies fail, notwithstanding the insurance arrangements, what is guaranteed is typically a great deal less than what might be in an individual pension pot. I am not saying that life companies are going to fail, but there is a hidden risk, and the self-invested personal pension structure, which in the past was very much for a provincial elite who had significant amounts of money, is now perfectly usable on a corporate basis. A person can have a corporate SIPP analogous to a group personal pension scheme. It has the advantage that basically the beneficiaries own the assets, so there is not that additional risk. 
 SIPPs have been subject to some rather archaic investment rules that have put them at a disadvantage compared with group personal pension schemes. Does the Bill sweep away those investment disadvantages? If it does not, will the Government consider doing so? I have a feeling that this matter may be governed by regulations that are secondary to the Bill itself. 
 The first crucial point is that individuals who obtained protected rights from a previous employment—when the scheme that they belonged to was contracted out—cannot transfer those protected rights into SIPPs, whereas they can be transferred into a group personal pension scheme. I see no logic in the difference. It is a simple issue that needs to be addressed. 
 Secondly, the crediting of tax relief should be on the same terms whether a personal pension scheme is structured as a SIPP or under an insurance contract, whereas at present a person gets the money a great deal earlier if they have an insurance contract as opposed to a SIPP. Thirdly, SIPPs have been unable to 
 provide life insurance contract arrangements, whereas group personal pension schemes can. Finally, group personal pension schemes can invest in off-exchange market securities, whereas SIPPs will not be able to do so for another two years. 
 There may be other issues that I am not aware of, but my simple point is that, if we are to have fairly open investment, there is no logic in SIPPs being disadvantaged on various fronts compared with group personal pension schemes. The playing field should be level. If anything, from the point of view of the pension saver, there is the matter of their having perhaps a marginal legal advantage in using the SIPP corporate structure as opposed to the group personal pension structure. 
 To some extent, these are probing amendments. As I said, my views are dichotomous, but I would interested to know whether the Government intend to have a complete free-for-all and not to think about offering the same sort of fairly relaxed protection for personal pension saving as is in place for ISA saving for old age. If they do not want to offer that protection, why have those prescriptions for ISA saving for old age? I just about come down on the side of thinking that the ISA rules are rather sensible and that without realistically restricting sensible investment, they protect people against imprudent investment.

Rob Marris: I am closely following what the hon. Gentleman says. Is he sure that the amendments deal with the right Bill? Traditionally, things such as security for investors have been dealt with not in Finance Bills, but in legislation such as the Trustee Investments Act 1961. He seeks to provide protection for investors to some extent, and I understand that, but the Finance Bill might not be the right place to do that.

Howard Flight: As I ever, I thank the hon. Gentleman for his suggestion. He may well be right. The issue comes up in the Bill because we are moving from a regime in which tax approval was the issue that controlled what people could invest in to a system in which registration has nothing to do with it. As far as I am aware, the Government have not had anything to say about the other areas of law that may be used to address the issue. That is why I made the comment that to some extent this is a probing amendment.
 There is a fundamental issue about whether the matter is dealt with by the Department for Work and Pensions or by trustee legislation and so on. Do we want to move to a complete free-for-all for all forms of money purchase pension investment? Would it not be prudent to have a liberal protective regime, whether introduced in this Bill or in other legislation?

John Butterfill: Order. Although it might have been more appropriate to move the amendments in consideration on other Bills, they are in order within the context of this Bill and, therefore, it is perfectly proper for them to be discussed in the context of this Bill.

Ruth Kelly: I understand the intention of the hon. Member for Arundel and South Downs to discuss whether a pension fund should be able to invest in any
 asset without restriction, provided that it is on a commercial basis. As he said in the stand part debate on clause 143, we are moving from a system based on Revenue discretion, where there are lists of permitted and non-permitted assets, and schemes must seek Revenue approval for their actions, to the system that we are discussing today, in which schemes operate within a legislative framework. In practice, under the current tax rules, however, the vast majority of schemes have no controls on their investments; only a minority of small schemes are subject to any control.
 Going forward, all schemes will—subject to any restrictions in other legislation, such as the Pensions Bill and a few other places that I am sure my hon. Friend the Member for Wolverhampton, South-West can think of—be able to invest in anything provided that it is on a commercial basis. The Bill aims to provide a comprehensive set of rules to cover all pension schemes, creating a simple and easily understood system and preventing anomalies. Different rules for different schemes create borderlines leading to complication, red tape and the need for advice, which in turn leads to greater burdens on the industry and the Revenue. We want to avoid that. 
 Very large schemes will invest in a wide range of assets, and we do not want to disadvantage them or their many millions of members by placing restrictions on their right to invest. Therefore, in a system designed for all schemes, it would not be right to impose unwanted new restrictions on them. 
 From a tax perspective, it should not matter whether a pension scheme invests in certain assets or not. The decision is a commercial one for the scheme and/or the members and the appropriate regulator. It is not for the tax regime to decide the scheme's investment policy. That accords with the DWP policy, which is that schemes should be free to invest as they see fit; it is not the place of Government to specify, for example, how much is invested in equities or other assets. It is up to scheme trustees or indeed members to decide what is prudent. 
 This is a deregulatory measure that will enable trustees to make their own judgment about what investments suit their scheme best. There are rules in the Bill to prevent that sensible commercial freedom from being abused by entering into non-commercial transactions that put scheme assets at risk or allow value to be taken out of those schemes. 
 The hon. Gentleman raised the question of the ISA regime. I know that he is familiar with this area, but I must point out that ISAs are different from pensions, having been designed to encourage personal savings by individuals in the short to medium term. To provide savers with flexibility, ISA regulations allow investment only in assets or schemes that are able to provide savers with instant access to savings. That is why investments are limited to those that are highly liquid and those that fall into the retail investment market, such as shares traded on recognised stock exchanges. The regulations also restrict the ability of savers to invest in less liquid assets such as real property. 
 Pension organisations are much larger. Most cover more than one individual and many cover many individuals. Individuals have limited rights to access their pension funds. That allows schemes to invest in a wide range of long-term investments that would not be appropriate for an instant access ISA. Rules relating to ISAs cannot therefore be directly applied to pension funds. I am sure that that is not exactly what the hon. Gentleman is suggesting. However, I am also sure that he will recognise the different designs of the ISA regime and the pension fund regime.

Howard Flight: There is a huge difference between an ISA and a large, ongoing defined benefit scheme, where no one would suggest that there is any need for such protection. However, I suggest to the Financial Secretary that there is not that much difference between a pot of money built up under the tax rules for a pension fund and a pot of money built up under the different—we could argue about which is the more attractive—tax rules for an ISA. From the perspective of an individual, both pots are there to build up assets for their retirement. That is how most people see them. Indeed, outside this Room, there are all sorts of debates about what the tax rules should be and what the mixture might be. That is a false distinction in the case of personal pots of money.
 It is interesting that the investment rules relating to ISAs are, as they were with regard to pension saving, related to tax approval. So, the idea that we are all saying, ''You can't have any investment constraints where it is a question of tax approval,'' is not right. In one of the main areas of savings, we continue to have such constraints related to tax approval. 
 I think that there is intellectual inconsistency in the area of an individual's personal money pots. I repeat my point that those pots are no longer just personal pension schemes. In no time at all people's occupational schemes will amount to being personal money pots under an employee-sponsored umbrella.

John Butterfill: Order. While I appreciate that there is some validity in making comparisons, we are not, in the context of the clause, considering the tax regime for ISAs or any other savings product. We are confining our consideration to pension schemes.
 Further to the point made by the hon. Member for Wolverhampton, South-West, I also make it clear that we are considering only tax approval in relation to pension schemes. It may be that investment constraints would be imposed by other legislation. That is a matter for the House when it considers that other legislation. We are simply dealing with tax approval for pension schemes in this area of the Bill.

Ruth Kelly: As usual, Sir John, you make excellent points. Indeed, they are ones that I could have made myself.
 To summarise briefly, the ISA account is an instant access account. Pension funds are clearly meant to provide income for retirement and are locked away until the person draws down their retirement income. Therefore, it is appropriate to have different schemes in place.

George Osborne: Will the Financial Secretary explain why the one restriction that is still in place, and in the Bill, is for a property investment limited liability partnership? As I understand it, there are already ways round that restriction by, for example, creating an exempt unit trust.

Ruth Kelly: I will come to the issue of property in a moment. We partly dealt with it under a previous clause.
 The hon. Member for Arundel and South Downs tried to make a case that trustees or members of pension funds were vulnerable to mis-selling of risky and inappropriate products but, as you rightly rule, Sir John, schemes may be restricted in various ways through other legislation—such as the Pensions Bill—and not necessarily through the tax relief provisions before us. Identifying and avoiding mis-selling is the responsibility of the Financial Services Authority with its conduct of business rules. That is the best place for that sort of regulation to take place. 
 The hon. Member for Tatton asked why income derived from investment held as property through a limited liability partnership is not exempt from tax. That type of income is not investment income but trading income, and the investment rules are not designed to exempt from income tax income that is derived from trading activities. Therefore, it is right in that case that the income is not exempted from tax. Exclusion replicates the rules under the current regime.

George Osborne: Why is that one kind of investment—investment held as property through a limited liability partnership—which the Financial Secretary says produces trading income, included in the Bill? Presumably, there are similar examples. It seems rather strange that there is that one exception in a catch-all, open-ended clause that gives all sorts of freedom, of which in many ways we approve. Would not other forms of investment fall into a similar category? They are not included in the Bill.

Ruth Kelly: As I understand it, the provision catches all limited liability partnerships, not just those in which investments are held as property. I will be happy to clarify that formally and to write to the hon. Gentleman if it proves not to be the case that the clause applies to all limited liability partnerships.
 Members of the Committee may be worried about the pension funds of members. Trustees are required to act prudently and sensibly in administering pension funds. They have done so, and we have no reason to believe that they will not continue to do so . I have already made it clear that, under the current rules, the vast majority of pension scheme members are in schemes for which there are no controls under tax rules about the type of investments that they can hold. 
 The Government are reviewing the progress that the occupational pension industry has made in implementing the recommendations of the Myners report. I wish to make just a couple of points on that, as I am aware that it does not touch directly on the amendments. We are making it a legal requirement for the first time that pension trustees must have familiarity with the matters before them. Our policy 
 intent is to upgrade the skills of trustees, so that they understand investment issues and the scheme design of the pension fund of which they are trustees. That is combined with replacing the minimum funding requirement with funding requirements that are more scheme-specific. Those provisions, which are being introduced as a result of the Myners recommendations, sit well with the new simplified tax regime. I hope that I have reassured hon. Members on those points. 
 On the points that the hon. Member for Arundel and South Downs made on self-invested personal pensions, I can confirm that we are sweeping away the investment rules for SIPPs, which will be subject to exactly the same investment rules as other schemes under the tax legislation. I do not accept his points about tax relief. It is up to the schemes themselves when they claim tax relief. However, if he wishes to follow up a particular point, I will of course follow it up with him. 
 The hon. Gentleman asked whether SIPPs would be able to invest in off-exchange shares. As he well knows, it was originally proposed that the scheme should come into force in April 2005. That has been delayed for a year in response to the consultation, as people asked for more time to change their systems and so on. Some people would like schemes to be able to invest in off-ex shares as soon as possible. However, given the concerns that were raised by many employers and pension providers about the practicalities of introducing the new systems, we believe that it is best to legislate this year and introduce the new regime in its entirety on 5 April 2006. I therefore ask the hon. Gentleman to consider withdrawing his amendment.

Howard Flight: As I said earlier, the amendments were intended to stimulate debate on the subject rather than a vote.
 I thank the Financial Secretary for her comments but the reality is not entirely as she has described. First, money purchase pension schemes do not have to have trustees any longer. Secondly, the role of the trustee as a policeman of potential investments for most money purchase pension pots is pretty much non-existent. Some personal pension schemes are packaged into lifestyle funds and are reasonably safe mixtures, but many money purchase pension schemes leave it entirely up to the beneficiaries to determine how they want to invest the money. 
 The Financial Secretary responded to my saying that I wanted to protect people from mis-selling by stating that that was the job of the FSA. That is true to some extent, but the FSA has not been particularly successful. The issue is not just mis-selling. The reality of investment is that individuals must realise that they are responsible for investment decisions. Many of the problems of the past few years have arisen from individuals thinking that, if something were regulated, they could never lose money. The truth is that many individuals may—out of lack of knowledge or in the hope that they will make lots of money—make unwise decisions for their money purchase pension pots. I see nothing to protect them. 
 I say to the Financial Secretary, fine, sweep away the restrictions on tax approval, even though that is inconsistent with the ISA regime, but are the Government proposing any other effective limitations that may be analogous to those in the ISA regime? As far as I know, they are not and it will be a free-for-all. 
 As a liberal, I do not want to put the issue to a vote, because the arguments are finely balanced. However, all of us can be sure that, in the next few years, large numbers of personal pension pot investors will say, ''Why were we allowed to invest in these assets in which we have lost a lot of money? Why have we a regime that didn't protect us from either mis-selling or unwise decisions? We didn't know what we were doing.'' That is the price that one must pay for a liberal economic regime. It would be inappropriate for me personally to oppose that, but we need to focus on the reality of what that will mean, not the glib assumption that everything will be fine and dandy because the trustees will keep an eye on things. That will not be the reality of a money purchase pension investment.

John Butterfill: Order. I have allowed the debate to go very wide of the amendment under discussion. I do not know whether the Minister wants to come back on the ISA point.
Ruth Kelly indicated dissent.

John Butterfill: In that case, we will not discuss that. I think that that debate was fairly well out of order. On the role of trustees, hon. Members will be pleased to know that, as far as our own trustees are concerned, we have been taking the Pensions Management Institute examinations and the majority of us have passed.

George Osborne: Who has failed?

John Butterfill: No one, but not all of them have yet taken the examinations. We have three new trustees.

Howard Flight: I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Rob Marris: I would like to ask my hon. Friend the Financial Secretary whether in subsection (1) after ''in respect of'', it should say ''undistributed'', because otherwise there is an argument that no income tax will be payable at all.

Ruth Kelly: I am obviously confident in the drafting abilities of counsel and our team. However, given that my hon. Friend has drawn attention to that point, I promise to respond to him in writing to ensure that the clause is correct.
 Question put and agreed to. 
 Clause 175 ordered to stand part of the Bill. 
 Clause 176 ordered to stand part of the Bill.

Clause 177 - Relief for contributions

Question proposed, That the clause stand part of the Bill.

David Laws: I do not want to detain the Committee for too long on the clause but, with the related clauses through to clause 183, which deal with the issue of tax relief for members' contributions, it raises some fairly important policy issues for the Government, and it would be useful to get the Financial Secretary's comments on some of them.
 The background to the Bill and the Government's broader policy on pensions is that they are obviously concerned about whether the existing pension regime is encouraging people to save enough for their retirement. When the Department for Work and Pensions issued its Green Paper in 2002, it said that it thought that as many as 3 million people were not making adequate provision for retirement, and that there might be 5 million to 10 million people on top of that who were making too little provision and who should either be saving more or working longer. 
 As the Institute for Fiscal Studies pointed out in its paper on the Government's tax proposals, the main tool that the Government use to alter the financial returns of saving in a pension is tax relief, and there are no proposals to alter the rates at which relief is given. This set of clauses, which starts with clause 177, codifies at the existing rates the tax relief that members receive. My question is whether that is the right approach, or whether the Government should be not codifying, but amending their existing proposals. 
 The Financial Secretary may point out that she is trying to make the tax reliefs that we are dealing with in the clause more transparent and comprehensible by explaining to people that, if they are basic rate taxpayers, for every £1 that is contributed, they will receive back a higher amount thanks to the tax relief. However, as the Institute for Fiscal Studies pointed out in its commentary on the Government's tax proposals, given that there is presumably no legislation preventing private pension providers from promoting tax relief in that way, that seems unlikely to have a significant effect—positive or negative. 
 When we started debating the series of clauses that deal with tax relief on pensions, the Opposition acknowledged that the Government have put in place, and improved on, a tax regime for pensions that is extremely generous by European and developed-country standards. The Financial Secretary seemed to take some satisfaction from having that confirmed by the Opposition. However, it is significant that, although we have one of the most generous systems of tax relief on pensions in Europe, we also have one of the meanest systems of provision in terms of the basic state pension.

George Osborne: Will the hon. Gentleman remind the Committee of the Liberal Democrat policy on linking the state pension to earnings?

John Butterfill: Order. I hope that the hon. Gentleman will not be tempted down that road. It
 has nothing to do with the clause.

David Laws: You are quite right, Sir John. I have already offered to send the hon. Gentleman an early copy of our pensions policy. He may even have a ticket of his own to come to the Liberal Democrat conference in September and hear our debate.
 In other areas, the Government are seeking to deal with the relative unattractiveness of many of our tax relief savings vehicles by improving tax relief for people on lower incomes so that it is not just those who receive tax relief at the 40 per cent. rate who end up being the major beneficiaries of tax-relieved saving in pensions. They have been considering savings gateways and other mechanisms of giving match relief for people on low incomes. That would unlevel to some extent the current playing field for tax relief on pensions, where there seems to be a broad theme of tax neutrality so that if someone gets relieved on their contributions going into a pension they then pay tax on coming out. 
 The Minister might therefore say that it would be expensive to give additional tax reliefs for people on lower incomes and to codify that in the Bill as opposed to the existing regulations. However, there is a problem with that argument, which is that the existing system of tax reliefs is already arguably quite generous in relation to the issue of tax neutrality. We have debated the tax-free lump sum on which tax is not paid on the way in or the way out, and I will not return to it. The Government have acknowledged that they are making the tax system more generous in that regard. 
 A lot of people who get tax relief on their pensions are higher rate payers when they are saving and in work, so they get relieved at the 40 per cent. rate of tax. Many of them will go on to earn under the upper rate threshold in retirement, and they will therefore pay only the basic rate of tax, which is currently 22 per cent. They are getting relief at 40 per cent., and they are paying tax at 22 per cent. Arguably, in terms of the system of tax relief and the extension of the tax-free lump sum, we have very generous tax relief for saving, and compared with the countries of Europe, we have very good provision in terms of people's own private provision for retirement. 
 That is wonderful for that sector of the population who are able to save because they have the disposable income to do so, and who get the benefit of most of the tax relief. However, it does not do much for people on lower incomes who may not only not have the money to put into these schemes but receive tax relief at a lower rate. The argument is about whether the Government should merely be codifying, through clauses 177 to 183, the existing system of tax reliefs. Should they not be seeking to go further? When we compare the tax regimes that face people on different incomes, we discover that those on lower incomes are reliant on a very mean basic state pension, that they then receive means-tested benefits and after that they get very modest tax reliefs. The question is whether the 
 Government should be adjusting things in these areas to be more generous.

John Butterfill: Order. I have allowed the hon. Gentleman to go very wide of the specific concerns addressed in clause 177, but I do not want this to develop into a general debate on taxation policy, so I hope the Minister will respond fairly briefly.

Ruth Kelly: The hon. Gentleman has made his points. However, I would argue that this is not a debate about taxation policy—we are here to discuss the simplification of the tax regime applying to personal and occupational pensions.
 The hon. Gentleman understands that it is the Government's policy to combat pensioner poverty, and I am not going to rehearse the arguments for having introduced the pension credits, the minimum income guarantee and the other measures that this Government have taken to combat pensioner poverty. He also understands other things—for example, that when the stakeholder pension was introduced we made it possible for an individual who has no earnings in any one tax year to contribute to a pension and to gain tax relief up to a value of £3,600. That system is being preserved under the new regime. 
 We are mindful of the hon. Gentleman's points. We must make tax relief as transparent and accessible to ordinary people as possible, which is why when Ron Sandler examined this area he suggested that we should look more broadly at matching schemes. We have done that through the savings gateway account, and in the pension simplification process we have looked at ways in which pension tax relief can be illustrated.

David Laws: I am grateful to the Financial Secretary for making those comments, and I will focus on clause 177. She has codified the existing reliefs in clause 177 and the associated clauses, but she has also just acknowledged that with the savings gateway the Government are moving towards more generous tax relief on savings for people on low incomes. Does she rule out returning to this issue and adjusting in a more generous way the tax reliefs for people on lower incomes?

Ruth Kelly: I am very interested to hear the hon. Gentleman argue that that is the direction in which we should be moving. Obviously, I shall take his representation into account when we consider such matters in future tax years. However, as he well understands, it would be totally inappropriate for me, as the Minister with responsibility for pension tax relief, to give any indication of where we might or might not go in the future.
 The reforms will give substantial benefits to millions and millions of ordinary taxpayers and people who have no earnings in any particular year. For example, they give increased benefits to women who take career breaks. They will be able in any year before a career break to build up a sizeable pension fund in the full knowledge that they will be unable to make contributions of more than £3,600 in the years in which they are not in work. That will substantially help people on low incomes. I ask the hon. Gentleman 
 to accept that we have introduced a radical reform that will benefit up to 15 million ordinary pensioners. 
 Question put and agreed to. 
 Clause 177 ordered to stand part of the Bill.

Clause 178 - Relevant UK individual

Ruth Kelly: I beg to move amendment No. 323, in
clause 178, page 152, line 47, at end insert— 
 '(2A) For the purposes of this section and section 179 relevant UK earnings are to be treated as not being chargeable to income tax if, in accordance with arrangements having effect by virtue of section 788 of ICTA (double taxation agreements), they are not taxable in the United Kingdom.'.
 The clause gives two key definitions for the purposes of determining tax relief: relevant UK individual and relevant UK earnings. Relief is given on UK tax, and it is right that only UK individuals or those who have earnings chargeable to UK tax should benefit from it. 
 Tax relief will be available on a member's contributions to a registered pension scheme made by or on behalf of the member only if they are a relevant UK individual. An individual will be a relevant UK individual for a tax year if he or she meets any one of four criteria. The first two are that the individual must have relevant UK earnings chargeable to income tax or be resident in the UK at some time during the tax year. The third situation is the individual who is not resident in the current tax year but became a member of a registered pension scheme when they were resident and have been resident in the UK at some time in the previous five years. Finally, a person with general earnings from overseas Crown employment or the spouse of such an individual will be a relevant UK individual. 
 For the purposes of the provisions, relevant UK earnings mean employment income, income from a trade, profession or vocation, or certain other income that is treated as earned income. 
 The amendment inserts a clarification for the purposes of clauses 178 and 179 to ensure that if income chargeable to tax is not taxable by virtue of a claim under a double taxation agreement, that income is not treated as relevant UK earnings for the purpose of determining the maximum amount of relief to which an individual is entitled in respect of pension contributions. I believe that the provisions are fair as well as simple and therefore commend the amendment to the Committee.

Howard Flight: May I just ask the Financial Secretary a relevant question? An individual who lives outside the UK does not pay any UK tax. Given that fact, I have never understood why UK pension schemes should not be open to people from all over the world. In the past, that has always been resisted, even though there was no loss of revenue. Will these provisions have that net effect?

Ruth Kelly: I can confirm to the hon. Gentleman that they will.
 Amendment agreed to. 
 Clause 178, as amended, ordered to stand part of the Bill. 
 Clauses 179 to 184 ordered to stand part of the Bill.

Clause 185 - Relief for employers in respect of

George Osborne: I beg to move amendment No. 273, in
clause 185, page 157, line 27, after 'contributions', insert 
 '(which includes payment of money, a transfer of assets or any other transfer of money's worth)'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 274, in
clause 185, page 157, line 32, leave out 
 'if they are allowed to be deducted'.
 No. 283, in 
clause 188, page 160, line 33, after 'Ireland)', insert ', or 
 (c) in prescribed circumstances.'.

George Osborne: The clause deals with tax relief for employers' contributions to pension schemes. The amendments are fairly technical, so I will rattle through them.
 On amendment No. 273, it is not clear from clause 185 whether employer contributions, except in the form of cash, will benefit from tax relief. Of course, that ambiguity exists in current legislation, although the Revenue will accept employer contributions as long as the transfer is unconditional. Given that we have a new regime, and will not have the approval system any more, it seems sensible to clarify that. The amendment would make it clear that a contribution in the form of shares or in another non-monetary form will benefit from tax relief. 
 Amendment No. 274 is also to clause 185. The Government want to replace the mandatory declaration in respect of employer ordinary contributions with a reference to the normal principles of schedule D, which of course comes under the Income and Corporation Taxes Act 1988. That is understandable, because in this case—though not in others—it wants to remove the distinction between occupational and personal schemes. Of course, one assumes that the underlying policy intention is to encourage pension saving through tax relief. Our amendment makes it clear that mandatory tax relief is granted to employers. Otherwise, the clause allows doubt as to whether the employers are absolutely entitled to a reduction in respect of pension contributions. We do not think that it is clear that tax relief is mandatory. 
 Amendment No. 283 is to clause 188. The clause limits deemed contributions that qualify for tax relief to the statutory debt under section 75 of the Pensions Act 1995 and the relevant equivalent Northern Ireland legislation. In practice, employers may find themselves making other payments, even when statute does not require it. For example, the section 75 debt includes an estimate for expenses of wind-up. As hon. Members may know, in practice this may be insufficient, so an employer may simply agree to meet the full expenses and/or the cost of any necessary or appropriate trustee 
 insurance, even if the estimate for section 75 purposes proves insufficient. In such circumstances—and there may be others—relief should none the less be available. There may be other payments, such as those envisaged under the amendments proposed to the Pensions Bill, which will also need to be covered if they are brought into effect. 
 As I say, those are technical amendments, but they are an attempt to improve the legislation and to help the Government achieve what they want.

Ruth Kelly: The hon. Gentleman is, of course, correct to say that the Government's aim is to encourage more people to save now for pension provision in future, and we want to encourage employers to contribute to their employees' pension provision. Employers have, of course, traditionally had a key role in providing pensions for their employees, and we want that to continue under the new regime. In pursuit of those aims, clause 185 will allow an employer to claim a deduction for contributions made to any registered pensions scheme. In a simplified regime, instead of there being different rules for employer contributions to an occupational scheme or a personal pension scheme, as the hon. Member for Tatton pointed out, single sets of rules will apply to all employer contributions.
 The clause provides that contributions will be allowed as a deduction in the accounting or other period only as they are paid and only if they meet the normal tax rules of deduction for computation of profits. That means that, where a contribution is paid wholly and exclusively for the purpose of the business, it will be allowed as a deduction. 
 Not all the normal tax rules that apply to deductions will apply here. The normal tax rule that disallows capital expenditure from deductions will not apply for contributions paid to registered pension schemes, so initial contributions to establish a scheme, which might under normal rules be considered to be capital and therefore not appropriate for a deduction, will be allowed under the rules in clause 185. 
 The amendments would extend the circumstances in which deductions were allowed. Amendment No. 273 would allow employers to make their contributions in the form of transfers of assets, while No. 274 would allow those contributions to be deducted automatically. Amendment No. 283 would deem payments made in ''prescribed circumstances'', which are not defined further, as contributions. 
 On amendment No. 273, we do not accept that the transfer of assets or money's worth should be allowed as a contribution. It could lead to abuse in a scheme where a member exercised particular control in the sponsoring employer. I note that there is no provision in the amendment as to how such a transfer should be valued. That would inevitably lead to complex arguments between the Inland Revenue and employers on the correct valuation of assets transferred. We think it right that contributions to a registered pension scheme on which tax relief is available should be limited to monetary amounts paid. 
 We see a case—in limited circumstances—for assets transferred to be allowed as a contribution and have, as the hon. Gentleman has pointed out, provided for that in clause 184. That allows the transfer of certain Inland Revenue-approved shares to be treated as a member contribution. We do not accept that any additional provision should be made for non-monetary contributions. 
 On amendment No. 274, we have moved away from automatic deduction to a ''wholly and exclusively'' test. Under the new regime, we have removed all existing controls on funding contributions and benefits. That means that there could be some situations in which automatic relief was not appropriate. For example, in respect of directors of the employing company, or people connected to proprietors of or partners in a business, to introduce rules that excluded such payments would have been long, complex and against the aims of simplification. 
 The ''wholly and exclusively'' test is well understood and has applied to employer contributions to personal pension schemes for 14 years without causing any great difficulty. Any employer providing pensions to all their employees on an equal basis will continue to get a deduction on contributions paid and need not worry about falling foul of the test. 
 Amendment No. 283 would extend the meaning of deemed contributions in clause 188 to include payments made in ''prescribed circumstances''. There is no indication in the amendments as to what the prescribed circumstances might be. Clause 188 is designed to deal with a situation where an employer has a legal obligation to pay a debt in specified circumstances. Extending the clause to cover payments that were not incurred under a legal obligation without any clarification in the legislation as to what those circumstances might be would extend the meaning of deemed contribution far too widely. Of course, if the payments satisfied the general rules for employer deduction in clause 185, they would be allowed as a deduction. 
 I urge the hon. Gentleman not to press the amendments.

George Osborne: On amendment No. 273, it is interesting that the Financial Secretary has ruled out contributions other than in the form of monetary contributions, with the exception of those permitted under clause 184. I do not know whether that is more restrictive than the current regime, which is more ambiguous, with the Inland Revenue accepting contributions provided that the transfer is unconditional. We shall see.
 I understand the Financial Secretary's arguments on amendment No. 274. We disagree on the issue, but I will not press it to a vote. 
 Amendment No. 283 talks about ''prescribed circumstances'' in the sense that the Inland Revenue, rather than anyone else, will do the prescribing. I gave the Financial Secretary an example of an expensive wind-up, where, although the debt under section 75 of the 1995 Act included an estimate of that cost, it was insufficient, as is often so, and the employer agreed to 
 meet the full expenses and the cost of any necessary or appropriate trustee insurance. In those circumstances, relief is currently available. I am not sure whether it would be available under the Bill, given the fairly restrictive nature of clause 188. However, these points will be argued out with the Revenue at length, and perhaps in the courts. They have had their day in Committee. 
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 185 ordered to stand part of the Bill.

Clause 186 - Spreading of relief

George Osborne: I beg to move amendment No. 282, in
clause 186, page 159, line 21, after 'which', insert 
 'have accrued under the pension scheme to or in respect of members, or 
 (c) benefits which'.
 The clause is, from the Government's point of view, about spreading tax relief to stop large companies manipulating pension payments for corporation tax relief. It kicks in when a pension contribution is 210 per cent. more than in the previous year and is more than £500,000. I should like to make a couple of brief stand-part-ish comments on that, before moving on to my amendment. 
 The National Association of Pension Funds has said that the clause is somewhat at odds with clause 185, in that the spreading provisions are mandatory, but the relief provisions are not, despite our best efforts to make them so. Perhaps the Financial Secretary could address that difference of approach. There seems to be one rule for the Revenue and another rule for everyone else. The Financial Secretary will have received a letter, which was copied to you and others, Sir John, from Maurice Parry-Wingfield, tax director of Deloitte and Touche, who writes: 
''This provision does not appear to take into account the volatile nature of the funding of defined benefit pension schemes. For example it would not have been unusual for regular company contributions to more than double in recent years following poor investment performance. Under the current rules, full relief is given if the intention is to pay at the higher rate for a sustained period of time, and spreading of relief would only be required on 'special contributions'. We would propose that a similar exemption apply under the new regime where the funding level requires the higher contribution to be paid over a sustained period of time . . . As such it may encourage companies to take contribution holidays where surpluses are revealed on an actuarial valuation rather than fund more conservatively.''
 Amendment No. 282 would go quite a long way to addressing that, because it would make it clear that a payment to a registered scheme to fund an existing deficit, for example, did not require spreading to gain relief. At the moment, the only exemptions to the spreading requirement are if large payments are required to fund cost of living pension increases for all pension members in the scheme, or to cover new scheme members. 
 One person in the industry wrote to me to say that, even with those exemptions, the new rules on spreading tax relief on employer contributions to pension schemes could cause problems in times of 
 company expansion. Employers who are trying to make up a pension scheme deficit will be hit, because such action is not covered by the exemption. They may be discouraged from doing what they want to do, which is to make up a deficit, because they will be hit by the spreading of relief. My amendment No. 282 does the Government's work for them and solves the problem.

Ruth Kelly: Before responding to the amendment, may I remind the hon. Gentleman that we are introducing generous rules that allow employers to claim a deduction for contributions paid to registered pension schemes? There is to be no cap or limit on the amount of contributions that an employer can make in respect of its employees, and contributions paid will be allowed as a deduction when calculating taxable profits. Where an employer makes an exceptionally large contribution to a registered pension scheme, we would not wish to deny a deduction for it. However, we wish to continue the practice that is currently operated under Inland Revenue discretion for approved pension schemes to spread relief on those exceptional contributions over a period of years.
 Under simplification, contributions will help to generate surpluses that may remain in schemes. As more funding is necessary, the surplus can cushion that and contributions can be gradually increased without the need for large, one-off injections of funds, as had to happen in the past. We have considered the provision carefully and it is not retained lightly. It seems to us that the new regime will allow employers to generate surplus funds, which can be used to guard against future downturns. I think that that is virtuous behaviour and that the spreading rules will seek to encourage it. 
 The alternative approach that employers can take is to delay funding until the very last minute allowed by the Department for Work and Pensions. That would definitely not be the sort of behaviour that we want to encourage. Firms taking advantage of the flexibility of simplification to pre-fund need not worry about spreading, but equally we do not want to encourage people to delay funding. Therefore, spreading aims to encourage advance funding. 
 We have considered the point raised in the letter that the hon. Gentleman cited, but surpluses will arise only in fully funded schemes. In such a scheme, the ordinary contributions plus the retained surplus should be sufficient to avoid the need for special contributions. The new rules encourage persistent, steady funding and not the stop-start funding that was a feature of the surplus rules that were previously in place. 
 Employers will be able to more than double their contributions from one year to the next without triggering the spreading rules. As the hon. Gentleman has pointed out, we will allow contributions to increase from one year to the next by 110 per cent. before requiring that a proportion of the contribution paid in the current chargeable period be spread. By bringing the spreading rules into statute, 
 employers will be better able to plan their contributions. 
 We have provided for certain contributions to be exempted from the spreading rules where they are paid to fund a cost-of-living increase for pensioner members, or to meet a future service liability for new entrants to a scheme. Therefore, the hon. Gentleman's amendments in relation to that subject are unnecessary and would provoke the sort of behaviour that he seems to want to discourage.

George Osborne: At least the Financial Secretary read the letter from Deloitte and Touche, even if she did not agree with it. I am not as confident as she is that the proposal will encourage responsible company behaviour. It may result in situations where companies want to make up the difference and to fund their schemes properly, but are discouraged from doing do by the spreading regime. However, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Sitting suspended for a Division in the House. 
 On resuming—

Ruth Kelly: On a point of order, Sir John. This morning, the hon. Member for Tatton asked whether the rules in clause 161 on the assignment of benefit rights would prevent the payment of a legal aid board payment, or a payment in respect of a Child Support Agency order from a member's pension. I have taken further advice and am pleased to confirm that such payments are not assignments of benefit rights. They do not, therefore, fall within the scope of clause 161 and are not unauthorised payments for the purposes of the pension rules.
 Clause 186 ordered to stand part of the Bill. 
 Clauses 187 to 193 ordered to stand part of the Bill.

Schedule 31 - Taxation of benefits under registered

Amendment made, No. 427, in 
schedule 31, page 446, line 2, at end insert— 
 '(2A) Omit the entry relating to section 623.'.—[Ruth Kelly.]

George Osborne: I beg to move amendment No. 399, in
schedule 31, page 446, line 30, leave out 
 'accrues in that year irrespective of when any amount is actually paid' 
 and insert 
 'is paid in that year'.
 The schedule is about how pensions and lump sums are to be taxed. I confess that the amendment is very technical and complex. The reason for it is that there is a potential timing problem in the relationship between new sections 579A and 579B. New section 579A(2) provides that new section 579 does not apply if, when the pension is paid, an unauthorised payment charge arises. New section 579B applies only when new section 579A applies. However, one will not know whether and to what extent 579A has been disapplied 
 until the pension is paid, at which time one can see whether 579A(2) is relevant. I am delighted that I got through that without the hon. Member for Wolverhampton, South-West asking me what it was all about.

Ruth Kelly: I am delighted that the hon. Gentleman has moved his amendment with such precision and clarity. He has taken me rather by surprise as I was not expecting so technical a point to be raised on the schedule. Perhaps it would be best if I wrote to him. The amendment would change the basis of the assessment that we are introducing in the simplified regime set out in new chapter 5A of the Income Tax (Earnings and Pensions) Act 2003, a more substantive point than the hon. Gentleman made.
 We have provided that pension income including pensions, annuities and income withdrawal will be taxable when it accrues rather than when it is paid. It will be taxable on the person receiving or entitled to the pension, and will be subject to the operation of PAYE by the person who pays the pension. That matches the way in which pensions from approved retirement benefits schemes, state pensions and other UK pension income are currently taxable. It will change the basis of assessment for pensions and annuities from former approved superannuation funds and from personal pensions on a paid or receipts basis. Pensions and retirement annuity contracts are currently taxable on the arising basis. There is a transitional provision for retirement annuity contracts, which we shall turn to when we debate schedule 4 and which will allow that basis to continue. 
 If I understand the amendment correctly, it would change the basis of assessment of taxable pension income in a tax year from the amount that accrues in a tax year to the amount that is paid in the year. If that is not the intention, perhaps the hon. Gentleman would clarify the point. We want as simple a basis as possible in the schedule. Taxing pensions on the amount that accrues rather than on the amount that is paid allows the payment to be spread over the years to which the payment relates, and there is no danger of an administrative error in the scheme causing higher taxation of pensions. 
 The basis of assessment that we are adopting will put the taxation of pensions from registered pension schemes on the same footing as the basis on which the state pension and other pension income from UK pensions is taxed. That will bring clarity, consistency and fairness and is the right way to go. I therefore urge the hon. Gentleman to withdraw his amendment, unless he has a different point to make.

George Osborne: When one is preparing for Committees, one receives representations. Many of the amendments that we make are substantive ones, but we also receive representations from pensions experts, lawyers and so on. The amendment was proposed by a lawyer. It is meant to be helpful, and I suggest that the Government go away and consider the point that I have made, which simply replicates a point made by a leading pensions lawyer. If there is any merit in it, they should find an opportunity to amend the Bill; if not, let us just forget that we had the debate. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

David Laws: I beg to move amendment No. 188, in
schedule 31, page 447, line 40, at end insert— 
 '(g) a charity lump sum death benefit'.

John Butterfill: With this it will be convenient to discuss the following:
 Amendment No. 189, in 
schedule 31, page 448, line 24, at end insert 
 ' ''charity lump sum death benefit'' '.

David Laws: My last contribution, as you rightfully spotted, Sir John, was rather broad. Like the hon. Member for Tatton, I intend to make a slightly narrower point about the schedule.
 Last week we discussed some of the provisions that the Government have made in the Bill, which are included in the earlier clauses and schedules 28 and 29, to meet some of the conscience concerns of the Brethren, particularly in the effect of the alternatives to the secure pension fund for which the Government made provision. The hon. Gentleman made some comments last week about the fact that the Government had responded to concerns from that group in relation to that particular issue. 
 I thank the Financial Secretary and her colleagues, including the Paymaster General, for the amount of time that they, along with other Departments, have put in over the years to address the concerns of the Brethren and other groups. When dealing with major legislation of this kind, it would be very easy for Governments to ignore the concerns of small minorities. It is appreciated when Ministers take the time to sit down with such groups, draft changes to the legislation and sometimes table amendments that deal with the groups' concerns. 
 The Brethren's concern is that there appears to be an element missing from schedule 31. That element is a specific reference to the charity lump sum death benefit. The Brethren are concerned that the Government may not have intended to leave that out, and it may be an oversight. The Brethren wondered whether it would be appropriate to accept an amendment to the schedule to clarify the Government's intention. 
 I hope that the Financial Secretary can accept the amendment so that the Government's intention, as I understand it, can be stated in the Bill. If that is not necessary, perhaps the Financial Secretary can put it on record that the Government's intention is as understood by the Brethren.

Ruth Kelly: I hope to answer that point briefly. I agree with the hon. Gentleman that lump sums should not be taxed if they are charity death benefit lump sums, and that they should be treated in the same way as they would be in cases of serious ill health and certain other death benefit lump sums.
 I hope that the hon. Gentleman will be pleased to learn that the effect of his amendment is already achieved. I am happy to put it on the record that the fact that a lump sum has been paid to a charity nominated by the member or, if the member made no 
 nomination, by a dependant is sufficient to secure its tax-exempt status on the recipient charity. The hon. Gentleman's amendment is not necessary, so I urge him to consider withdrawing it.

David Laws: I am grateful to the Financial Secretary for clarifying those points, and I am pleased that she has put on the record in clear terms the Government's intention. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 31, as amended, agreed to.

Clause 194 - Short service refund lump sum charge

Question proposed, That the clause stand part of the Bill.

George Osborne: As amendment No. 113 was not moved, we have a couple of hours more than we expected. We will see whether my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who is not here and who should have moved that amendment, reads his Committee Hansard and spots what has happened.
 The clause relates to the income tax levied when there is a short service refund lump sum—in other words, when someone has not been in an occupational scheme long enough to qualify for any of the benefits. Under the Pension Schemes Act 1993, that cannot be longer than two years. 
 Governments have become progressively stingier in this area. In the 1980s, the tax charge was 10 per cent., and could be applied to people who had been working for up to five years. In the 1990s, the tax charge was doubled, and the five-year period was reduced to two. 
 The reason why I wanted to speak to this clause is because I have uncovered a new stealth tax, which, of course, is very exciting. It is like discovering a new species of Amazonian butterfly.

Stephen Pound: They are not that rare.

George Osborne: Before the hon. Gentleman said that, I was going to point out that there are hundreds out there that are not uncovered. Here we have uncovered one: the Government are introducing a 40 per cent. tax rate for lump sums of more than £10,000, doubling the rate for larger sums. That prompts the question, why? I thought that the buzz word of the Bill was ''flexibility''—flexible retirement; and allowing people to do several jobs while moving around with their pensions. It turns out that the more familiar buzz words of ''stealth tax'' are creeping back. One cannot allow a Government increase in taxation to go uncommented on, so I thought it would be interesting to draw it to the Committee's attention.

Ruth Kelly: I am afraid that I shall have to disappoint the hon. Gentleman. Before addressing his specific points, I shall deal with the overall clause.
 The clause provides for a charge to income tax for a registered pension scheme. We are talking about a 
 short service refund lump sum to a scheme member. Such a lump sum will arise where a member of an occupational pension scheme receives a refund of his or her pension contributions following a short period of employment, which does not bring with it a right to pension benefits under pensions law. The rate of the tax charge is 20 per cent. on the first £10,800 of the lump sum, and 40 per cent. on the rest. The hon. Gentleman rightly draws attention to that figure, which I shall justify in a moment. The tax is payable by the scheme administrator, who may deduct the tax from the payment, so that the member receives the lump sum after tax. The tax charge is necessary, for pension contributions will have received tax relief when they were paid. 
 The tax rates are designed to recoup the tax relief that has already been given on pension contributions. By definition, such contributions will have been paid over a very short period of time—generally two years or less—and pension contributions in excess of the £10,800 threshold are likely to have received relief at the higher 40 per cent. rate of tax. 
 Introducing generous limits on the amount of tax-relievable pension contributions—compared with current rules, under which, typically, the maximum that can be tax-relieved is 15 per cent. of remuneration—will mean that, without such a differential, there will be a tax advantage to putting in contributions of up to £200,000. Such contributions will receive tax relief of 40 per cent. and claim a refund of contributions that will be taxed at only 20 per cent. Therefore the provisions are both necessary and desirable.

George Osborne: They may be necessary; they may even be desirable, but will the Minister concede that they are a new tax—a tax increase?

Ruth Kelly: I do not believe that the provisions are in any sense less generous than the current regime. I have already explained how the tax relief system operates: the maximum tax that can be relieved is 15 per cent. of remuneration. We have to set the limits in such a way as to recoup the tax paid. I do not accept that there is any additional tax-raising on the part of the Exchequer through this clause.
 Question put and agreed to. 
 Clause 194 ordered to stand part of the Bill.

Clause 195 - Special lump sum death benefits charge

George Osborne: I beg to move amendment No. 336, in
clause 195, page 164, line 17, leave out '35%' and insert '32%'.

John Butterfill: With this it will be convenient to discuss the following:
 Amendment No. 337, in 
clause 196, page 164, line 39, leave out '35%' and insert '32%'.

George Osborne: This amendment is another attempt to reduce tax and to ensure that the Government do not take too much of our income. The clause explains that a 35 per cent. charge for income tax, known as a special lump sum death benefits charge—there is an easy phrase—is to be levied on, for example, pension
 protection lump sum death benefits, annuity protection lump sum death benefits and unsecured pension lump sum death benefits. The clause provides for a 35 per cent. charge to income tax on authorised surplus payments, known, as one might guess, as an authorised surplus payments charge.
 I understand that both those rates—the 35 per cent. rates—were set in 1995, when income tax was 25 per cent. Some 10 per cent. was added to that to compensate for the tax-free nature of the fund; for example, the benefits of advance corporation tax. We could have had a lengthy debate if I had managed to table an amendment about advance corporation tax, but I had lost the will to live at some point and did not do so. The point is that at the time the charge was justified as being roughly right. Income tax was 25 per cent., and 10 per cent. was added to create the level for those charges. 
 Since then, of course, income tax has dropped to 22 per cent. A couple of those drops were caused by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), and one was caused by the current Chancellor. In addition, of course, ACT has been abolished. However, the charge remains at 35 per cent. It should be 33 per cent. at most, and possibly lower, given the abolition of ACT. Why is the Inland Revenue very ready to increase taxes, but never forthcoming in reducing them? The amendments would reduce the charge to 32 per cent. 
 It is worth the Committee remembering that we are not talking about a penalty charge. Many of the charges that we talk about are penalty charges for unauthorised payments of one kind or another. This, however, is a tax on people's pension pots and the money paid out when they die. Although in this clause and clause 196 the Inland Revenue takes on itself the power to change the rate by regulation, it is more important to have that power in the Bill. The Revenue has the power to change the rate by regulation from 35 per cent. and has never exercised it, so perhaps the Committee should encourage it by putting 32 per cent. in the Bill.

Ruth Kelly: As the hon. Gentleman has expounded, the amendments are to reduce from 35 per cent. to 32 per cent. the rate of tax that we propose for the special lump sum death benefits charge in this clause and the authorised surplus payments charge in clause 196. He has set out why he thinks that it is the right time to make the change, but I will explain why in those two circumstances we think a charge of 35 per cent. is right.
 In a simplified regime, pension schemes will have much greater flexibility in the benefits that they can offer members. In particular, they will be able to offer a tax-free lump sum death benefit up to the value of the lifetime allowance that the member had unused at the time of his or her death. The vast majority of lump sum death benefits will not be subject to the special lump sum death benefits charge, nor will they be subject to the lifetime allowance charge. 
 The lump sum death benefits charge applies only to certain lump sum death benefits that are paid when the member dies before he or she has reached 75 and the 
 pension funds have already crystallised. The circumstances in which the charge is most likely are where the member has chosen the option of an alternative tax treatment under a scheme pension or a value protected lifetime annuity. As the hon. Gentleman rightly points out, the tax charge replicates a similar provision in the current regime where the rate is also 35 per cent. The rate is both attractive and fair. 
 Let us examine who would be likely to pay tax under the special tax charge. It may be someone who had used up all their lifetime allowance and specified that death benefits were to be treated as a pension protection lump sum death benefit because the special charge is at 35 per cent. rather than 55 per cent., which is the rate at which lump sums in excess of the lifetime allowance are chargeable. That is wholly acceptable, as the funds will have already been tested against the lifetime allowance. 
 The vast majority of taxpayers below the lifetime allowance will not pay the charge and their death benefits will be tax-free. The vast majority of people using the provision will be higher rate taxpayers, so 35 per cent. is a generous rate of tax to apply to those funds. It is certainly not a penal rate of tax. It is probably not revenue-neutral and probably represents a cost to the Exchequer. In no sense could it be described as a stealth tax. On those grounds, I hope that the hon. Gentleman will accept that we have before us a generous rate of tax and not press his amendments.

George Osborne: Of course, it was a generous rate of tax when the Conservative Government introduced it. The problem is that after they subsequently reduced income tax and, as I conceded, the current Chancellor also reduced it, it has been left high and dry by events. However, I am not going to persuade the Financial Secretary to change her mind and I do not wish to press it to a Division, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 195 ordered to stand part of the Bill.

Clause 196 - Authorised surplus payments charge

George Osborne: I beg to move amendment No. 400, in
clause 196, page 165, line 4, at end insert 
 ', or 
 (c) in prescribed circumstances.'.
 This is again a fairly technical amendment. It applies to the limited exceptions granted to companies from the 35 per cent. charge—what would have been a 32 per cent. charge if the Government had accepted my previous amendment. We would argue that the provision may be too restrictive. Incidentally, before the Financial Secretary says anything about my ''prescribed circumstances'', I must make it clear that the Inland Revenue would prescribe the circumstances. The reason for giving this flexibility is that, as drafted, the exclusions from the tax charge may be too restrictive. For example, it could catch 
 refunds of contributions paid in error if the employer had not yet sought to use the payment to reduce profits chargeable to corporation tax. The amendment would give a little more flexibility and avoid such an unintended consequence.

Ruth Kelly: As the hon. Gentleman outlined, the clause allows registered occupational pension schemes to pay surplus funds back to employers, subject to a tax charge of 35 per cent. payable by the scheme administrator. Subsection (6) provides that the charge will not apply if the sponsoring employer is a charity or is otherwise exempt from tax. That replicates the current legislation, which provides a similar exemption from taxing amounts of surplus returned to employers. The reason for the exemption is that such employers would not have received any tax relief on the amounts contributed to the scheme, and so in turn are not taxed on amounts of surplus funds returned to them.
 Amendment No. 400 would provide a power to extend the exemption to cover other circumstances. The clause as drafted already provides for exemptions for all sponsoring employers who would not have obtained tax relief on contributions. I do not agree that we should provide for other circumstances to be covered, as in every other case the employer will have received relief on contributions. The clause provides an appropriate exemption for all sponsoring employers who have not obtained relief on contributions. I see no reason to extend the provision. I therefore urge the hon. Gentleman to withdraw the amendment.

George Osborne: We were attempting to give the Inland Revenue a little more flexibility to cover circumstances that we thought might arise but that it had not considered, such as refunds of contributions paid in error, when the employer has not yet sought to use the payments to reduce profits chargeable to corporation tax. One of the consequences of the codification of much of what used to be done through tax approval and negotiation with the Inland Revenue is that the Revenue is closing down some of its options for flexibility. The amendment was an attempt to give the Revenue a little more flexibility, but it does not want it, so I shall remove the option, and I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 196 ordered to stand part of the Bill.

Clause 197 - Unauthorised payments charge

Ruth Kelly: I beg to move amendment No. 428, in
clause 197, page 165, line 25, leave out subsection (4).

John Butterfill: With this it will be convenient to discuss Government amendments Nos. 429, 435, 456, 457, 464, 467, 468, and 470.

Ruth Kelly: The amendments centre on the regulation-making power in clause 242. The regulations, which I have sent in draft to members of the Committee, will allow the Inland Revenue to make assessments of some of the new tax charges in the new
 regime, such as the unauthorised payments charge and the scheme sanction charge. The amendments give additional clarity to the regulation-making power, setting out in clause 242 precisely which charges are to be covered.
 Seven of the other eight amendments in the group merely remove from other clauses some redundant references. Amendment No. 470 ensures that any assessment raised on a scheme member under the clause relates properly to the liability assumed by that member. The amendments ensure that the regulation-making power is adequate and clear. I therefore commend them to the Committee. 
 Amendment agreed to. 
 Clause 197, as amended, ordered to stand part of the Bill.

Clause 198 - Unauthorised payments surcharge

Amendment made: No. 429, in 
clause 198, page 166, line 19, leave out subsection (5).—[Ruth Kelly.]
 Clause 198, as amended, ordered to stand part of the Bill. 
 Clauses 199 and 200 ordered to stand part of the Bill.

Clause 201 - Valuation of uncrystallised rights for purposes of section 199

Amendments made: No. 430, in 
clause 201, page 168, line 18, after 'would' insert 
 ', on the valuation assumptions (see section (Valuation assumptions)),'.
 No. 431, in 
clause 201, page 168, line 33, leave out from beginning to 'acquired' in line 34 and insert 
 'valuation assumptions, be entitled under the arrangement on the date if, on the date, the member'.
 No. 432, in 
clause 201, page 168, line 37, leave out from 'on' to 'acquired' in line 39 and insert 
 'the valuation assumptions, be entitled under the arrangement on the date (otherwise than by way of commutation of pension) if, on the date, the member'.
 No. 433, in 
clause 201, page 168, line 42, leave out subsection (7).—[Ruth Kelly.]
 Clause 201, as amended, ordered to stand part of the Bill. 
 Clauses 202 to 204 ordered to stand part of the Bill.

Clause 205 - Benefit crystallisation events and amounts crystallised

George Osborne: I beg to move amendment No. 403, in
clause 205, page 172, line 9, column 1, leave out 
 'The individual becoming entitled to a scheme pension under any of the relevant pension schemes' 
 and insert 
 'Payment commencing of a scheme pension to the individual under any of the relevant pension schemes.'.

John Butterfill: With this it will be convenient to discuss the following:
 Amendment No. 405, in 
clause 205, page 172, line 12, column 1, leave out 
 'The individual having become so entitled, becoming entitled to payment of the scheme pension, otherwise than in excepted circumstances, at an annual rate which exceeds the rate at which it was last paid by more than the permitted margin' 
 and insert 
 'The annual rate of a scheme pension which has commenced increasing, other than in prescribed circumstances, to an annual rate which exceeds the annual rate at which it was last paid by more than the permitted margin.'.
 Amendment No. 404, in 
clause 205, page 172, line 20, column 1, leave out 
 'The individual becoming entitled to a lifetime annuity purchased under a money purchase arrangement under any of the relevant pension schemes' 
 and insert 
 'Payment to the individual commencing of a lifetime annuity purchased under a money purchase arrangement under any of the relevant pension schemes.'.
 Amendment No. 408, in 
schedule 32, page 451, line 27, leave out 
 'the individual becomes entitled to it' 
 and insert 
 'payment to the individual commences.
 Government amendment No. 377.

George Osborne: We are now coming to the part of the Bill that is about the lifetime allowance. Clause 205 deals in particular with benefit crystallisation events, which are not, by the way, about chemistry sets but about testing someone's pension pot against their lifetime allowance to see whether they are liable for the lifetime allowance charge. The table on page 172 sets out the range of different benefit crystallisation events. For example, receiving a pension or lifetime annuity, or turning 75. It is a source of dismay to the official Opposition that that remains in the Bill, but there it is.
 Events 2, 3 and 4—receiving a pension, receiving a lifetime annuity or, in the best way that I can put it, receiving a particularly generous pension—are expressed as the individual ''becoming entitled to'' whatever it happens to be, such as a scheme pension. In other words, it is not the act of receiving payment but the act of becoming entitled to payment that triggers the benefit crystallisation event. We are not sure that that is the right criterion, which is why we tabled the amendments. Each of them in a different way seeks to achieve the objective that benefit crystallisation should occur only when payments of a pension or a lifetime annuity are made. 
 For example, amendment No. 403—this also applies to amendments Nos. 404 and 405—applies to the act of becoming entitled to receive a scheme pension. Without our proposed change, a member may have an actual right to draw a pension—indeed, the pension may be in a scheme in which no consent is required for payment at a particular age—but the person who is entitled to the pension may not wish to draw it. Under the clause, the benefit crystallisation takes place regardless. 
 The Financial Secretary may say that clause 155(3) on pension rules defines entitlement to a pension as including acquiring a right to receive one, but it can be amended on Report if the Government accept these amendments. Surely the point is that people should be judged on when they actually start to receive something, not when they become entitled to receive it. For example, someone may not wish to receive a fairly trivial pension—say, a 50p a month pension. They do not wish to trigger a benefit crystallisation event or take the pension. That is the point that we are trying to get across.

Howard Flight: May I give an illustration? Say these rules had been in place in 1998, and someone had been entitled to take a pension. Their pension pot may have been well over the limit, but by 2003 it may have been down by 40 per cent. as a result of falling markets. They might have had a tax bill and yet they were nowhere near the limit when they took the pension.

George Osborne: As always, my hon. Friend brings his experience to the Committee and makes a telling point. It is just common sense that benefit crystallisation should be when one starts to receive a scheme pension or lifetime annuity. Our amendments are designed to achieve that.

Ruth Kelly: The hon. Gentlemen seem to have misunderstood the Bill. The concept of entitlement is clearly defined. It is consistent and it recurs throughout the tax simplification legislation. A benefit crystallisation event is triggered on the individual becoming entitled to a certain benefit. Entitlement has a clear meaning in the legislation, as set out in clause 155. The legislation uses ''entitled'' to mean the point at which an individual's rights to receive benefits under a pension scheme cease to be prospective and become actual.
 I think that is the point that the hon. Member for Tatton is making. I contend that it is one that is already made in the Bill, and that his amendments are unnecessary.

George Osborne: It is great if my amendments are unnecessary, but that is not how I read the legislation. As I read it, benefit crystallisation is not triggered by actual payment but by entitlement. The Financial Secretary shakes her head, but line 9 of page 172 says:
''The individual becoming entitled to a scheme pension under any of the relevant pension schemes''.
 If the definition of ''entitled'' means actually receiving payments, that is good news and we have achieved the objective of clarifying the legislation. We certainly did not read it that way, nor indeed did others who know even more than we do about the issue. 
 Given the Financial Secretary's assurances, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

George Osborne: I beg to move amendment No. 406, in
clause 205, page 172, line 20, column 2, leave out 
 'The aggregate of the amount of such of the sums, and the market value of such of the assets, representing the individual's rights under the arrangement as are applied to purchase the lifetime annuity' 
 and insert 'RVF x P'.
 There was a Government amendment tagged on to the last group, but it did not receive the parliamentary scrutiny that it deserves. One has to trust the Inland Revenue that it was not very important and trust that the Clerk would have put it as a separate item for discussion if it had been significant. 
 Amendment No. 406 recalls an earlier argument that we were having about the unlevel playing field in the evaluation of DB and DC schemes—to use the shorthand. Under benefit crystallisation event 4, where the individual becomes 
''entitled to a lifetime annuity purchased under a money purchase arrangement'',
 and the amount crystallised is defined as the amount of money or assets in the pot. 
 Our argument is stronger than it was in the earlier debate, which concerned the charge that might be levelled in circumstances where the Inland Revenue needed to value uncrystallised pots. In amendment No. 406 we are talking about benefit crystallisation. It would change the way that the amount is valued from simply considering the amount of money in the pot to using a new formula, which is RVF x P. We were not entirely original in coming up with that formula: it is used for defined benefit schemes. RVF is the relevant valuation factor, which is defined in clause 263 as 20, and P is the amount of pension payable to an individual over the next 12 months. In other words, we seek to achieve exactly the same method for testing a defined contribution pension against the lifetime allowance as currently applies for a defined benefit pension. That would mean that holders of defined contribution pensions would be treated fairly and could enjoy the same pension. 
 I return to the point that I made earlier. If we take a step back from the legislation, we can see what its end effect will be: a person with a defined benefit pension will be entitled to a pension of around £75,000 and someone with a money purchase pension will be entitled to a pension of only £55,000. Whatever arguments are deployed, those are the basic facts. The defined benefit schemes in the private sector—not in the public sector, not in the case of the MPs' scheme—are closing and more and more people are being moved to defined contribution schemes. It is possible to envisage the virtual elimination of the defined benefit scheme over a period of many years—certainly in the private sector and possibly even in the public sector at some point. 
 The legislation is constructive and I understand why the Government want to simplify the calculation of the lifetime allowance for people with defined benefit schemes. I applaud them for coming up with the 20 to 1 factor and for changing their view during the consultation process and listening to the Association of Consulting Actuaries and others. However, the result has been the creation of an unlevel playing field. Although the Financial Secretary will tell me that annuity rates may change over time, as far as I can see at the moment, people with defined contribution 
 schemes will be limited in the amount of pension that they will be entitled to in comparison with people with defined benefit schemes. 
 Of course, we are talking about people who have very large pension pots—the upper end of the market—but the issue is important because it sends a signal to the rest of the market about what the Government value and what they do not, and whether they are treating both kinds of arrangement fairly. There is a widespread feeling, which we are all aware of, that people in the public sector feather their own nest while people in the private sector have had enormous problems with their pension schemes over the past few years. 
 In a small but significant way, this issue contributes to that argument and I can foresee us all receiving letters in the next few years from pensions experts—there are a surprising number of them—in our constituencies, saying, ''Here is yet another example of you politicians having one rule for yourselves and civil servants, and another rule for others.'' This is a good opportunity for the Government to send a signal that that is not the case.

Ruth Kelly: We had a protracted debate this morning in which I set out the case relating to a single valuation factor. I made the point that the arrangement was simple, that it had been called for by the actuary profession and others, that we had responded to consultation and that it was generous. I said that it would not make sense to apply a single valuation factor to all types of pension, given that there is income draw-down, as well as defined benefit and defined contribution arrangements. I argued that this arrangement was by far the most sensible way forward. I do not intend to rehearse all those arguments yet again.
 The amendment would change the way in which lifetime annuities are valued at benefit crystallisation events so that, instead of the purchase price of an annuity, the factor of 20, as applied to the first year's annuity payments, would apply. That is apparently to equalise the treatment of defined benefit and defined contribution schemes, although I would point out that people in income draw-down will necessarily have their pensions valued in a completely different way. 
 The hon. Gentleman misses the fact, however, that that would disadvantage the vast majority of taxpayers. First, it would create uncertainty as to the amount that was crystallised, as the level of annuity payments could not be known in advance—depending, as they do, on fluctuating annuity rates. Secondly, it would result in a much more complex calculation. Indeed, some might call it an absurd calculation that would involve taking a capital amount, turning it into an annual pension, applying one factor and then, using a slightly different factor, turning it back to a slightly different notional capital amount. That is neither simple nor sensible. 
 If people feel that the DB system is more generous, and that there is an advantage to being in a DB scheme rather than a DC one, as I made clear at length this morning, there is no reason for them not to transfer to a scheme pension set up by an insurance company, 
 should one decide to market such a vehicle to the non-corporate market. I am sure that if such an advantage exists to the extent that the hon. Gentleman seems to suggest, such a vehicle will be invented and promoted. 
 There is no need for the amendment. There is no unfair advantage for members of DB schemes rather than DC schemes. People can take advantage of whichever they find more attractive. I therefore urge the hon. Gentleman to reconsider the amendment.

Howard Flight: I do not believe that the Minister's responses were entirely realistic or correct. It is relatively easy to convert from a defined benefit scheme to a defined contribution scheme, whereas to convert a pot of money saved in a defined contribution scheme into a defined benefit pension is considerably more difficult.
 The materiality of the difference in treatment, as things stand and as my hon. Friend pointed out, is substantial. Those in a DB scheme effectively have a limit that is some 50 per cent. higher than those in a DC scheme. That is grossly unfair and unacceptable, particularly in the context that my hon. Friend referred to, namely that those in the private sector are—if hon. Members will pardon my language—screwed by comparison with those with generous public sector DB pensions. The provisions here are not complex. They are extremely easy, as is the arithmetic. One simply says—it applies equally whether people draw down or buy an annuity—''Here's the crystallisation date and here's the pot of money. The Government actuary can tell you precisely what annuity that pot of money would buy, so multiply it by 20 and Bob's your uncle.'' There is nothing very difficult about that, and the calculation is then on exactly the same basis as that for the DB scheme. 
 There is, in the background, the implication of what provision there is for inflation and whether there is a spouse's benefit. That is part of the reason, as my hon. Friend pointed out, for the size of the gap. It is disingenuous to say that it is nice and simple and actuaries are happy with it. I can assure the Minister that out there in the real world, the majority of people in the private sector with defined contribution pensions are distinctly unhappy at being thus disadvantaged. If the Government do not think that our amendment deals with all aspects of the matter, it behoves them to think a bit more about it.

Ruth Kelly: We are at severe risk of rerunning the debate that we had this morning. As I pointed out this morning, the Association of Consulting Actuaries, from which we took advice, recommended the single factor. Not only did it recommend the single valuation factor but, after considerable research, supported by evidence, it suggested that 20 to 1 was the most appropriate valuation figure, provided that there was an appreciable margin in the lifetime allowance, which there is.
 We had the option of trying to reflect market conditions, which the Faculty of Actuaries and the Institute of Actuaries said would not be appropriate. To return to the point made by the hon. Member for 
 Arundel and South Downs about the difficulty of converting from a DC to a DB scheme, under the new regime, there is no reason why that should not become a simple process. The insurance company merely says to an individual, ''I will pay you such and such an income per year in return for X pounds of your capital.'' It is an extremely simple process. If such opportunities exist, I am absolutely confident that the market will step in to deliver that product, but it is a question for them, not me.

Howard Flight: If the insurance companies provide the arrangements that the Financial Secretary describes, she seems to suggest that, in principle, they will determine the value of the pension for the purposes of the limit and then they will switch it back to a defined contribution arrangement. It would be better to deal with the arrangements up front. Until the pension is paid out, if it is as easy as she describes, there is nothing stopping an insurance company switching one way, then switching the other.

George Osborne: I will not rehearse the arguments advanced by my hon. Friend, but I agree with him. The Financial Secretary is trying to make our amendments seem more complicated than they are. It reflects a general strain of thinking that, when it comes to defined benefit schemes, the limit is how much pension one gets, but when it comes to defined contribution schemes, the limit is how much money one has in the pot.
 They are two different ways of judging how much pension one can have. That seems unfair. The Financial Secretary is stuck in a mindset that judges how much people have vis-à-vis a lifetime allowance, rather than looking at how much people get as a pension. That is what most people will see at the end of the process, and they will not be too concerned with the details. Given that we are on stronger ground than we were with our previous amendments—even if it is a re-run of a previous argument—and given that I am confident of victory, I will press the amendment to a Division. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived. 
 Clause 205 ordered to stand part of the Bill.

Schedule 32 - Registered pension schemes: benefit

George Osborne: I beg to move amendment No. 407, in
schedule 32, page 451, leave out lines 1 to 23.

John Butterfill: With this it will be convenient to discuss the following amendments:
 No. 409, in 
schedule 32, page 451, leave out lines 33 and 34.
 No. 410, in 
schedule 32, page 451, line 35, leave out 'increased' and insert 'percentage increase in the'.
 No. 411, in 
schedule 32, page 451, line 35, after 'pensions', insert 
 ', or that part of all scheme pensions,'.
 No. 412, in 
schedule 32, page 451, line 36, at end add 
 'except pensioner members of a prescribed class'.
 No. 413, in 
schedule 32, page 452, line 8, leave out 
 'and calculation B gives the greater' 
 and insert 
 ', calculation B and calculation C gives the greatest'.
 No. 414, in 
schedule 32, page 452, line 27, at end insert— 
 '(6A) Calculation C involves first increasing that annual amount to the annual amount which would have been paid if on each anniversary of the payment of the pension commencing, it had been increased by the permitted margin at that time, and second increasing that annual amount by whichever of the calculation A and calculation B gives the greater amount.'.
 Government amendment No. 434.

George Osborne: I am sorry that my confidence in pressing for a Division was not borne out by the result, but at least I persuaded the hon. Member for Yeovil (Mr. Laws), who is the floating voter in the Committee and could go either way. He is the judge of the strength of our arguments.
 The amendments are all slightly different, so I need to go through them one by one. Amendment No. 407 is, in effect, consequential on previous amendments. Paragraph 7 of the schedule would not be required if one defined crystallisation as the actual payment rather than the right to be paid. We have had that debate, so I shall move on to the other amendments. 
 The schedule provides an exception for the benefit crystallisation event when a particularly generous pension is paid; that is, a pension that increases by more than 5 per cent. or the RPI, whichever is higher. The exception is for schemes of at least 50 pensioner members. We certainly agree with the last part of the paragraph, which says that any exception should apply to all pensioners, but where does the 50-member cut-off point come from? It seems rather strange and is not explained. It is reminiscent of our previous debate about 50 members. Why deny the members of smaller schemes the bigger increases, or require them to gather up more of their lifetime allowance? What is the rationale for the 50-member cut-off point? Was there consultation on it? We certainly saw none, and that is why we tabled amendment No. 409. 
 Amendment No. 410 is on the same paragraph. It attempts to clarify the meaning of the provision. Again, there is the point about applying an increase to all members if a particularly generous pension is paid. 
 The Government use the word ''rate'', but it seems to be used to mean the amount of pension, whereas the point surely is whether the percentage increase in the rate is applied equally to all pensioner members of the pension scheme. 
 Amendment No. 411 applies to the same paragraph. There may be a defined benefit scheme in which the pension is partly a guaranteed minimum pension and partly an excess over that. One might give an increase only on the excess over the guaranteed minimum pension. Of course, the GMP revaluation is statutory and in part falls to the Government, but the schedule seems to prohibit giving an increase on the excess over the GMP. The amendment merely makes it clear that that is okay, provided everyone gets the same percentage increase in the same identifiable part of the pension. The Government have reasonable intentions. The amendment merely tries to ensure that the provision is not drafted too narrowly. My colleagues and I have done our homework. We have not just put ''in prescribed circumstances'' but tried to help the parliamentary draftsman with our amendment. 
 On amendment No. 412, for historic reasons, there may be circumstances in which the agreed increases of some classes of pensioner members are different from those of others, and one should not forget the change coming to the statutory indexation requirement for pension increases for future service. Some flexibility is required. There may also be cases of a member not wanting an increase. Most obviously, it could have implications for a member who elected for enhanced protection, which we will discuss under schedule 34. The Bill is not clear, so it is worth asking the question. An excess increase might have adverse effects on the continued enhanced protection in respect of other, not yet vested pension rights. 
 Finally, amendment No. 413 is about the catch-up increases. The greater of RPI, or 5 per cent., is said to be acceptable, as I mentioned. We all recall from the Pensions Bill that the statutory indexation requirement is being reduced to RPI or, if lower, 2.5 per cent., so many schemes will opt in, at least in relation to any future accrual. I believe that there is an assumption in the Government's 20 to 1 factor—this is one of the reasons that they came up with it—about increases in single years of less than the permitted maximum. It therefore seems harsh that if the scheme wants to give a catch-up increase, say, because funding has increased, and the level of increases has been ''paid for'', it is assumed that one cannot get there if one has had a bad year. I think that that is pretty clear.

Ruth Kelly: I intend to break this large group of amendments into four, taking first amendment No. 407, which would delete some of the rules in the schedule. I shall explain what those rules do and why they are necessary.
 The situation catered for is where an individual starts to receive a scheme pension or a lifetime annuity before the minimum pension age has been reached. Such payments will not be authorised in the new regime, unless the benefits are taken early because of ill health, so any that are made when the individual is below minimum pension age will be treated as 
 unauthorised payments. All the payments made after the member reaches the minimum pension age will be authorised payments, however. We still need to cater for benefit crystallisation events in such circumstances. The schedule therefore provides that where an individual starts to receive a scheme pension or a lifetime annuity before reaching minimum pension age, a benefit crystallisation event will occur when the individual reaches that age. 
 Valuation rules are also provided. Where the early payment is of a scheme pension, the benefit crystallisation event that occurs on reaching minimum pension age is valued at 20 to 1, as applied to the first year's pension after reaching minimum pension age. The situation is slightly trickier where a lifetime annuity is involved, because the purchase price of the annuity is no longer current. Instead, the 20 to 1 factor is applied to the first year's annuity payments after minimum pension age has been reached. The amendment would delete those rules, but they are necessary to ensure that a benefit crystallisation event occurs in such circumstances and that it is appropriately valued. 
 Amendments Nos. 409 to 412 would change the rule in the schedule which allows an exemption from benefit crystallisation event 3 in clause 205. Benefit crystallisation event 3 applies where a scheme pension increases by more than the permitted margin, which is broadly the higher of indexation and 5 per cent., as the hon. Gentleman outlined. However, the benefit crystallisation event does not apply where there are excepted circumstances. The schedule sets out the excepted circumstances, which allow increases in scheme pensions in excess of the permitted margin not to be benefit crystallisation events where there are at least 50 pensioner members and the increase applies to all of them. 
 Amendment No. 409, which the hon. Gentleman tabled, would remove the requirement for the excepted circumstances to be available only where there are at least 50 members, presumably on the grounds of fairness. A small scheme will not have access to the excepted circumstances. However, we believe that the limit is appropriate to prevent opportunities for abuse. For example, without such a requirement, a small self-administered scheme with, say, just two controlling director members, would be able to circumvent the lifetime allowance charge by providing an artificially low pension, then in a later year increasing the pension by an enormous rate, to take it to the level at which it was always intended to be. 
 The hon. Gentleman asked about our consultation, which was set out in the document published in December 2003. Without the requirement for 50 members there would be a risk that large, uncommercial increases would be made purely for the purpose of avoiding the lifetime allowance charge. It is essential that that limit be in place to prevent such avoidance opportunities. We believe that 50 members is approximately the figure needed for that purpose. 
 Amendment No. 410 would remove the wording in the excepted circumstances rule that requires 
''the increased rate to be applied to all . . . pensioner members''
 and replace it with a requirement that the percentage increase in the rate applies to all pensioner members. That would narrow the scope of the excepted circumstances, because the provision in the Bill allows for flat-rate increases as well as for percentage increases. That allows greater flexibility. The amendment would remove that flexibility, limiting the excepted circumstances to percentage increases only. 
 Amendment No. 411 seeks to extend the excepted circumstances, so that the increased rate applies not only to all the scheme pensions paid under the pension scheme but to 
''that part of all scheme pensions''
 paid under the pension scheme. It is not clear what ''that part'' refers to in the drafting. I also do not see the need for such a provision. 
 Amendment No. 412 seeks to extend the availability of ''excepted circumstances''. It would provide for the excluded circumstances to be available when an increased rate is given to all the pensioner members, except those of a ''prescribed class''. The intention appears to be for regulations to list classes of pensioner members to whom the increased rate may be denied. I will not go into whether the hon. Gentleman is correct in using the word ''prescribed'' in such circumstances. We could have a long debate on terminology. We believe that it is technically deficient. I am sure that he will take my word for that. 
 More important, the amendment would allow individuals to escape a benefit crystallisation event in circumstances where not all the pensioner members were given the same increase. That contradicts the policy intention of the excepted circumstances rules. 
 I have some better news for the hon. Gentleman on amendments Nos. 413 and 414. As he explained, those amendments seek to extend the meaning of ''permitted margin'' as it applies to benefit crystallisation event 3 in clause 205. Benefit crystallisation event 3 is triggered when a scheme pension is increased by more than the permitted margin. The permitted margin is, broadly, the higher of 5 per cent. and indexation as applied to the rate at which the pension was previously paid. 
 Amendments Nos. 413 and 414 seek to extend that permitted margin, so that it takes into account not only the increase in the rate at which the pension was previously paid but the overall increase in the pension since it commenced. I have reflected on the amendments and I sympathise with their aim. Unfortunately, they are defective, as they would be inserted in the wrong place in schedule 32. 
 I am unable to accept the amendments. However, I assure the hon. Gentleman and members of the Committee that I will consider the point further and introduce a Government amendment if that is appropriate. I am delighted that he is pleased with his victory. However, I ask him not to press his amendment or the others that I dealt with. 
 That brings me to Government amendment No. 434. It clarifies the valuation rules in the area of the lifetime allowance. When an individual becomes 
 entitled to a scheme pension, the relevant valuation factor of 20 is applied to the first year's pension as a means of valuing the fund. The amendment simply clarifies that the first year's pension used in that calculation must not take into account any reduction in pension payments made by the scheme to fund tax payable on the lifetime allowance charge. 
 The amendment is another example of the clarity and certainty that have been provided by the rules in valuing individual's rights under such an arrangement. I commend it to the Committee.

George Osborne: There we go. Towards the end of the day, we get a little laughter. The reason, I can reveal, is that I told the Financial Secretary earlier that I voted for her as Minister of the year when I was presented with a ballot paper at lunchtime. There were four choices. One of them was the Chancellor of the Exchequer, but I think that he has an eye on gaining a different title in the next year. I was happy to vote for her. She has obviously repaid the favour by accepting in principle amendments Nos. 413 and 414.
 However, as is always the case in Committees such as this, one is never allowed to enjoy the victory—there is always a reason why the Government cannot accept it. That happened to me on a couple of occasions during debates on the Pensions Bill when, having been rejected, lo and behold, my amendment, word for word, turned up on Report, but presented as a Government amendment. We do not mind, because the victory is one of principle and we are delighted that the Government have accepted that. 
 Amendment No. 407 is a consequential amendment. On amendment No. 409, I still question 
 the 50 limit, which seems both arbitrary and large. A scheme of 40 members is pretty large, and is unlikely to be the kind of small scheme that the Financial Secretary is concerned about. I take what she says, but the debate about schemes with more or fewer than 50 members will probably continue. We have already had it in different contexts in Committee, and we might well have it on Report, so I shall leave it for then. 
 On amendment No. 410, I take the Financial Secretary's point about the flat rate increase, and as I have been trying all day to give the Inland Revenue more flexibility, I do not want to reduce it now. I thought that I explained what I was talking about on amendment No. 411, which was about whether an increase can apply to part of a pension in a situation in which part of a pension is guaranteed minimum pension. I am sure that it can, and at this stage I am not that interested, so I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendment made: No. 434, in 
schedule 32, page 451, line 29, at end insert— 
 '(2) If the amount of the pension which will be payable will or may be reduced so as to reflect the amount of any tax under section 204 to be paid by the scheme administrator, that reduction is to be left out of account in determining the amount of the pension which will be payable for the purposes of sub-paragraph (1).'.—[Ruth Kelly.]
 Schedule 32, as amended, ordered to stand part of the Bill. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-two minutes to Six o'clock till Thursday 17 June at half-past Nine o'clock.